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Economic reforms grow key sectors, increase investment

Article - August 18, 2017

Faced with challenging global economic conditions, Indonesia is improving the ease of doing business, attracting cash inflows and wooing investors, particularly in the industrial sector

For years, Indonesia has faced a number of barriers for increasing its share of foreign direct investment. Investors have been frustrated by difficulty and lengthy process of land procurement, limited supplies of raw materials, utilities shortages and infrastructure short falls. All of this has come at an untold opportunity cost for the nation as potential international business partners look elsewhere.     

However since the election of President Joko Wido in 2014, the government has undertaken a number of concrete measures to mitigate these issues. Thirteen economic policy packages have been introduced, including deregulation measures and incentives that are designed to improve the ease of doing business.

Superstitions regarding numbers aside, these pro-business initiatives have addressed the key limitations and bottlenecks that have plagued investors.  

The very first package, released in September of 2015 was primarily aimed at boosting industrial competitiveness. It included reducing bureaucracy and improved the ease of acquiring licensing while boosting legal compliance in business practices.

Not surprisingly, the industrial sector was the first to be focused on, due to its strategic significance to the country’s economy, as the country’s Minister of Industry Airlangga Hartarto, explains, “Indonesia’s industries contribute 30% to 40% to GDP and that is set to grow with the further development of new strategic sectors and manufacturing.”

This focus is helping to ween the country away from the commodities sector, especially oil, which has dominated its economy since colonial times.  

Dr. Bambang Brodjonegoro, Indonesia’s former Finance Minister and current Minister of National Development Planning, acknowledges the need for a pivot in this area: “It is challenging to find new sources of growth, especially after the collapse of the commodity price, as well as weakening global demand. On top of this, we have had increased market volatility as a result of Brexit. Within this weak and uncertain position globally, Indonesia needs to find alternative growth and of course, there are sectors like manufacturing that we can capitalize on to create higher growth.”

“Indonesia’s industries contribute 30% to 40% to GDP and that is set to grow with the further development of new strategic sectors and manufacturing”

Airlangga Hartarto, Minister of Industry

An especially important weather vane for the manufacturing industry is the textile and garment business, which is seen as the sub-sector that has moved this area forward for decades. It has grown to become fully integrated is and well known internationally for quality end products.

“In 2015, the textile and garment industry employed 3 million workers – 10.6% of total employees in the manufacturing sector – with an investment value that reaches IDR 8.45 trillion (approx. $627 million). The contribution is also significant to national income with exports valued at $12.28 billion in 2015. To raise the exports, the government facilitates the industry with potential incentives; including tax exemptions for raw materials used in exported products from value added tax and lower gas prices,” says Dr. Brodjonegoro

Lowering energy prices is an important point that has been factored into the 13 packages and will be needed to ensure Indonesia’s National Medium-Term Development Plan (2015-2019) is carried out successfully.

 This strategy includes the development of industrial zones beyond their traditional base of Java by “facilitating the development of 14 industrial estates and 22 centers for small and medium scale industry around the country; and increasing competitiveness and productivity through enhancement of technical efficiency, technology and innovation, and the development of new products”, says Mr. Hartarto.

At the core of developing these industrial zones, as well as supporting special investment zones is close coordination among the ministries. Cooperation on infrastructure development in these areas between the Ministry of Industry and the Ministry of Public Works is absolutely vital to ensure roads, electricity, water and other vital links are in place to support industrial growth.

The defense sector is one area of industrial activity that is set to benefit from these policies. Historically, Indonesia was traditionally strong in defense production until restructuring measures were implemented following the 1997 Asian Financial Crisis. Aerospace capacity was particularly sophisticated and now through international cooperation it is hoped that this area of industry can be revived.  

Indonesia’s Minister of Defense, General Ryamizard Ryacudu tells United World, “With new regulations meaning 49% of an Indonesian defense company can be foreign owned, there are also opportunities for greater partnerships and technology transfer. We are currently in partnership with some Italian companies to build an armament factory. We would of course welcome further partnerships like this where there is also a high degree of technology transfer”.

The general is bullish about the benefits international cooperation will have on the quality of vehicles, ships and aircraft used by Indonesia’s defense force, and is keen to see more partnership.

“The more private companies involved the better, so that they can compete to provide the best equipment, and especially maintain the major equipment. There are 200 shipyards in Indonesia, but only 20 are appointed to build ships and vessels for us. We can ask them to build armored personnel carriers, vital aircraft, vessels and drones,” he says.

These incentives to boost industrial production have worked hand in hand with regional economic integration policies that will open up more markets to Indonesian industrial producers. According to Mr. Hartarto, “The government strives to enlarge the market and improve cooperation for national industry. This is materialized in the comprehensive implementation of free trade agreements. More opportunities for international industrial cooperation are expected to increase the performance of exports, as well as increase employment in Indonesia.”

At the core of this international cooperation is taking advantage of the ASEAN Economic Community which Indonesia joined at the end of last year.

The Indonesian government’s pragmatic approach to taxation is another measure that has shown results, and is somewhat reminiscent of Winston Churchill’s famous question: “Can a people tax themselves into prosperity? Can a man stand in a bucket and lift himself up by the handle?”

Taking this principle into account, a tax amnesty was announced to encourage the repatriation of funds which has injected a vast amount into the economy and, seemingly conversely into state revenue treasuries.

“There are many individuals and companies in Indonesia that have vast fortunes in assets and banks abroad, even though the income or revenue was from Indonesia,” says Dr. Brodjonegoro.

“This has resulted in limited liquidity domestically, and if we want higher growth we need that capital back in the economy. From our point of view…we cannot force them to bring the money back, because of legal limitations in Indonesia. We need to persuade them, which means giving an incentive, which in our case is the tax amnesty. With the tax amnesty, companies and individuals will repatriate or bring capital back to Indonesia, or declare the unrecorded asset to the Indonesian tax authority.”

To date, the first phase of the tax amnesty has raised $6.6 billion for the national budget.